By Catherine DeBono Holmes, Esq. and Victor T. Shum, Esq.
The proposed Senate Bill reauthorizing the EB-5 Regional Center Program would restrict the types of projects that can be funded with EB-5 financing and amount of funds that can be raised with EB-5 financing.
The Senate Bill, entitled “American Job Creation and Investment Promotion Reform Act of 2015,” which was introduced on June 4, 2015, contains some provisions that would strengthen the oversight of the EB-5 Program, but the Bill also contains some provisions that would effectively disqualify many construction projects seeking to obtain financing through the EB-5 Program, and reduce the amount of EB-5 financing that could be obtained for many other construction projects. In particular, these provisions would change the ways in which jobs are counted for purposes of determining which projects qualify for EB-5 financing, and how many jobs are credited for each project. There is no explanation in the Bill or by the Senators proposing these changes as to the reasons why they believe these changes are necessary, or in what way they believe these changes would improve the EB-5 Program. In fact, we believe these changes are unwise and should be removed from the Bill because it is counter to the original intent of EB-5 program by reducing foreign investment and job growth and by hurting small and medium sized American businesses from accessing much needed capital.
The proposal to allow only 90% of the requirements for job creation to be satisfied through indirect jobs would effectively eliminate EB-5 financing for all construction projects to be completed in two years or less which are not associated with operating businesses following completion.
One of the provisions of the Bill states that up to 90% of the jobs required to be created in order to qualify for EB-5 financing may be created indirectly through investment. The EB-5 Program currently has no requirement that any portion of the jobs created be direct or indirect jobs, and requires simply that at least 10 new jobs be created for every investor. If the Bill is passed with this provision, it would mean that at least 10% of the jobs for every EB-5 project must be direct jobs. It is not clear in the Bill if that means that the entity in which EB-5 investors invest their funds must have direct employees (i.e. W-2 employees), or that the project must include direct effect employees, as calculated by an economic model such as RIMS II or IMPLAN. We assume it means the latter, because if it meant that the entity in which the EB-5 investors invested must have its own employees, that would be an extremely severe restriction, because most EB-5 investment entities are formed as financing vehicles for specific projects, and are not themselves employers of any employees.
Even if this provision is intended to mean that the project must include direct effect employees from an economic model, it would automatically exclude many construction projects. This is because EB-5 regulations currently do not allow any construction project that will be completed in under two years to count any direct construction jobs for EB-5 purposes. Therefore, this provision requiring at least 10% direct employees would automatically exclude any multi-family, condominium, office or other construction project that took under two years to build and was not part of an operating business. This requirement of at least 10% direct employees could be met by developers of real estate intended to be used for an operating business, such as hotel, restaurant, or assisted living facility, because those projects would have direct employees in their operating phase. In addition the requirement could be met by a construction project that would take over two years to build, because those projects are allowed to count direct construction jobs. However, it is unclear why the requirement for at least 10% direct jobs should be required at all, given that its effect would be to automatically shut out of any EB-5 financing construction projects to be completed within two years for multi-family, condominium, office or other types of commercial development. Moreover, since smaller, short-term projects which are completed in less than two years are the most viable types of projects in economically disadvantaged communities, this requirement would appear to be counter to the intent of the EB-5 program of promoting job growth and economic stimulus.